Central Bank Is Likely to Take More Emergency Steps to Stabilize Markets, Restore Confidence

By

Jon Hilsenrath And

Megumi Fujikawa

Updated March 16, 2011 12:01 a.m. ET

Bank of Japan officials kept up their strong response to the country's post-earthquake crisis Wednesday, but fragile financial markets and the economic toll of the disaster could press the central bank to do even more in the weeks ahead.

On Wednesday, the bank poured money into short-term credit markets for a third day, this time offering a total of five trillion yen ($61.8 billion) in loans to financial institutions in a continued bid to avoid cash crunches in the wake of the disaster. That was less than Tuesday's action, when the central bank moved to calm markets that had crashed following news of fires and spiking radiation levels at the Fukushima Daiichi nuclear-power complex. And on Monday, the bank provided a record 22 trillion yen in same-day funding and other short-term market support, bringing its short-term money-pumping activities to more than 46 trillion yen, or more than half a trillion dollars.

The central bank has been trying to stabilize financial markets, bolster confidence, prop up asset values and ensure that businesses have access to cash.

The Bank of Japan has doubled to 10 trillion yen its planned purchases of exchange-traded funds, real-estate investment trusts, corporate debt and Japanese government bonds. The program aims to support asset prices, but so far has failed to stem deep stock-market declines.

The central bank also has been flooding financial markets with trillions of yen in short-term loans. And it has a program to provide 30 trillion yen in three- and six-month loans to financial institutions at 0.1% interest.

These actions did little to calm panicked investors earlier in the week; the Nikkei 225 index tumbled almost 11% on Tuesday alone. But it was up 375.99 points, or 4.4%, at 8981.14 at the end of Wednesday's morning session, as investors hunted for bargains.

If the central bank steps up its response to the crisis, it would likely be through these programs. Short-term interest rates in Japan are already near zero, so it can't push them lower as central banks often do in an economic crisis.

"I hope the BOJ understands that it is the one institution in the world that can act swiftly in financial markets to instill some sense of order,"
David Zervos,
a fixed-income strategist at Jefferies & Co., a U.S. investment bank, wrote in a note to clients. It "now has the tools" to act in a meaningful fashion, he continued, calling for the asset-purchase program to be expanded to 50 trillion yen or more as a show of force that would build confidence in financial markets.

At 10 trillion yen, the program, which the Bank of Japan calls "comprehensive easing," is still much smaller than the Federal Reserve's $600 billion program of U.S. Treasury bond purchases, though the Japanese program is much more wide-ranging.

Responding to a reporter's question Monday, BOJ Governor Masaaki Shirakawa said none of the board members considered the scale of Monday's expansion "shabby." He said, "We think we raised the size of risk-asset buying considerably."

Despite the earthquake and its aftermath, the BOJ has maintained an optimistic view of the economy, saying it is emerging from a deceleration last year. But officials are likely to be shaken by the drop in Japanese stocks, which in turn could undermine business and household confidence.

The central bank is set to update its economic projections in late April. Its next policy meeting is April 6 and April 7.

In an interview in February, Mr. Shirakawa said the Bank of Japan has played an important role in containing financial shocks, though he also expressed doubts about the central bank's ability to do much more than that through its unconventional programs.

Some observers said there are serious limits to the role the BOJ can play. "You can't use monetary policy to solve a nuclear disaster, or even earthquakes, but actions to stabilize the markets are perfectly natural," said
Edwin Truman,
a fellow at the Peterson Institute for International Finance and former Treasury Department official.

A dilemma for the BOJ in the months ahead involves Japanese government bonds. Unlike the Fed, the Bank of Japan has been reluctant to buy more government bonds. The central bank, which has been allowed to operate independently of the country's elected leaders only since 1998, fears being accused of funding big government deficits by printing money.

The Japanese government's debt is twice the size of the nation's overall economic output, a much-larger debt burden than any other industrialized country. Political pressure could mount on the central bank to buy more as government-funded rebuilding programs kick in.

According to a BOJ statement Monday, board member Miyako Suda voted against expanding the comprehensive easing program because she didn't approve of buying more government debt.

Before Friday's earthquake, BOJ officials also were considering whether to expand or alter a three trillion yen program in which they funneled low-interest loans directly to banks making credit available in favored sectors. They could look to tap that program in a search for new ways to finance postquake rebuilding, though some BOJ officials are uncomfortable with the program and feel it is the domain of the Ministry of Finance, which manages fiscal authority.

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